Guaranteed Minimum Payments to wife in a husband-wife partnership tosave on Social Security tax - pe


C

caj11

Okay,

For the first time I have a partnership as a client, both for business and personal tax preparation. It is a husband & wife partnership, each with a 50% share, but the wife made all the money in the partnership. She simply chose to set it up this way. The partnership netted about $220,000 during 2012, so that would normally mean $110,000 of profits for each of them, and each of them subject to almost the maximum Social Security tax.

But what if the wife was to receive a Guaranteed Minimum Payment of $219,000 from the partnership, splitting the remaining $1000, so only she pays the maximum amount of Social Security tax, and her husband only pays a little bit of Social Security tax. Is this permissible or is the IRS already wise to things like this?

Chris Johnson, EA
 
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P

paulthomascpa

caj11 said:
For the first time I have a partnership as a client, both for business and
personal tax preparation. It is a husband & wife partnership, each with a
50% share, but the wife made all the money in the partnership. She simply
chose to set it up this way. The partnership netted about $220,000 during
2012, so that would normally mean $110,000 of profits for each of them,
and each of them subject to almost the maximum Social Security tax.

But what if the wife was to receive a Guaranteed Minimum Payment of
$219,000 from the partnership, splitting the remaining $1000, so only she
pays the maximum amount of Social Security tax, and her husband only pays
a little bit of Social Security tax. Is this permissible or is the IRS
already wise to things like this?

Chris Johnson, EA

I think it's permissible if the spouse carries the work load or there is
another valid reason, besides tax avoidance, to make that guaranteed payout
in that fashion.
 
R

removeps-groups

Convert the partnership to a single member LLC with the husband as an
employee before year-end. Pay the husband a modest salary. The husband
pays his fica and medicare tax from his salary. The LLC matches that
amount. The LLC (wife) deducts the husband's salary and fica/medicare
match as a business expense. The wife files a Schedule C and pays SE tax
on the net income and deducts her half of the SE tax as an adjustment to
income.
Do they have to do married filing separately, or is married filing jointly
possible?
 
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